What are ERC-20 tokens?

What are ERC-20 tokens?#

The term ERC stands for Ethereum Request for Comment, and 20 denotes the proposal identifier number, signifying its prominence in the Ethereum ecosystem.

ERC-20 tokens are crucial components in the realm of Web3 development, representing a standardized approach to token implementation on the Ethereum blockchain network. These tokens adhere to a set of rules outlined in the ERC-20 standard, offering a consistent framework for creating and interacting with blockchain-based assets.

Unlike previous token implementations that lacked uniformity, ERC-20 tokens follow a structured set of guidelines, streamlining their integration into various applications, wallets, and exchange platforms.

This standardization has revolutionized the development landscape by eliminating the need for developers to comprehend the intricacies of each unique token’s smart contract code. With ERC-20, creating and integrating tokens becomes more efficient, promoting seamless interactions and interoperability among diverse decentralized applications within the Web3 ecosystem.

ERC-20 Features#

  1. Standardization: ERC-20 tokens adhere to a set of standardized rules and specifications, ensuring consistency in their implementation across the Ethereum blockchain. This standardization promotes interoperability and ease of integration with various platforms.

  2. Transferring and Receiving: ERC-20 tokens can be easily sent and received between addresses on the Ethereum blockchain. The standard includes functions like transfer and transferFrom to facilitate these transactions.

  3. Total Supply and Balance Inquiry: ERC-20 tokens provide methods to check the total supply of tokens in circulation (totalSupply) and to query the balance of tokens held by a specific address (balanceOf).

  4. Approval Mechanism: The standard includes functions (approve, allowance, and transferFrom) that allow for a more complex interaction, enabling one address to approve another to spend a certain amount of tokens on its behalf.

  5. Events: ERC-20 tokens utilize events, such as Transfer and Approval, which are triggered during transactions. These events help external applications or interfaces track token movements and changes in approval status.

Use Cases of ERC-20 Tokens#

ERC-20 tokens are fundamental building blocks for DeFi applications. Here are some possible use cases:

  1. Liquidity Pools: ERC-20 tokens are often used as assets in decentralized exchanges (DEXs) and liquidity pools, allowing users to trade and provide liquidity for various token pairs.

  2. Collateral in Lending Protocols: Many decentralized lending platforms in DeFi accept ERC-20 tokens as collateral. Users can lock their ERC-20 tokens in smart contracts to borrow other assets.

  3. Governance Tokens: Some DeFi projects issue ERC-20 tokens as governance tokens, allowing holders to participate in the decision-making processes of the protocol.